Executive summary

On 17 March 2025, the German Federal Central Tax Office (FCTO) published an update to the fact sheet on the eligibility for an exemption or refund of withholding tax (WHT), applicable to dividends under the German anti-treaty shopping rule.

The fact sheet does not provide new insights on the requirements for objective eligibility for a relief (eligibility based on own activity and substance) or for the alternative "main benefit" test (which allows the taxpayer to prove the absence of a tax motivation for an interposed entity). However, it gives important insights on the personal eligibility for a relief and the stock exchange clause. In this regard, the fact sheet's interpretation now agrees (again) with a look-through approach that takes the treaty eligibility of indirect shareholders into account even if they are based on a different treaty than the one that applies to the applicant entity. This view seems closer aligned with the wording of the German anti-treaty shopping rule and the relevant jurisprudence of the European Court of Justice (ECJ).

The fact sheet is especially relevant for taxpayers with higher-tier shareholders residing outside of the European Union (EU) to which the benefits of the EU Parent Subsidiary Directive (PSD) are not directly available. So far, the updated fact sheet is only relevant for dividend WHT but it remains to be seen whether the fact sheet for WHT relief for royalty payments will be updated accordingly. The new interpretation based on the fact sheet should be helpful in discussions with the FCTO regarding royalty cases.

Detailed discussion

Background

Based on German domestic law, applying WHT relief (e.g., WHT refund or exemption based on a Double Tax Treaty (DTT) or the EU PSD) requires a pre-clearance issued by the FCTO. This involves an electronic application for a WHT exemption certificate or a WHT refund where it is demonstrated, among other things, that the applicant is generally entitled to such benefit and meets the requirements of the German anti-treaty shopping rule.

The treaty- and PSD-overriding German anti-treaty shopping rule was substantially amended in 2021 through the Withholding Tax Relief Modernization Law. The amended anti-treaty shopping rule (sec. 50d para. 3 Income Tax Act (ITA)) generally applies to all transactions after 8 June 2021. It targets structures interposing an entity that is resident in a jurisdiction that allows for relief from German WHT (under a DTT or an EU Directive) while the ultimate owner would not be entitled to benefit from such relief (For details, see EY Global Tax Alert, German Government issues draft law on modernization of withholding tax relief and various additional topics, dated 20 January 2021).

Specifically, the German anti-treaty shopping rule in its current version stipulates that an entity is not eligible for WHT relief to the extent that:

• Its shareholders would not be eligible for the same benefit if they received the income in question directly (personal eligibility)
• The source of the income in question is not economically connected to an own substantial economic activity of the entity carried out through its own substance (objective eligibility)

If both of the above requirements are met, the anti-treaty shopping rule generally assumes an abusive structure. However, the assumed abusive structure can be disproven if it can be demonstrated that none of the main benefits of interposing the entity was a tax benefit (main benefit test). Furthermore, an abusive structure is deemed to be disproven if the (applicant) entity is publicly traded (stock exchange clause).

If the dividend recipient (direct shareholder) is personally eligible for a relief but fails to meet the objective eligibility (or any of the exceptions) under these criteria, it must be demonstrated that the eligibility requirements are met at the level of its shareholder (indirect shareholder) if the requirements are not met at the level of the indirect shareholder (look-through approach).

Personal eligibility

Based on the amended anti-treaty shopping rule, an entity would be entitled to WHT relief if its shareholder would be eligible to the same benefit if the indirect shareholder received the income in question directly (personal eligibility). The amendment of the anti-treaty shopping rule introduced high uncertainty for taxpayers as to whether eligibility for the same benefit is limited to the same legal basis of the claim (the shareholder needs to be eligible based on the same DTT or the same EU Directive) or limited to the same quantitative claim (the shareholder needs to be entitled to the same amount of WHT reduction).

Following the law change in 2021, the FCTO referred to the underlying legislative materials and took the view that the same legal basis of the claim is required. In the updated fact sheet, the FCTO now seems to revert to the pre-2021 interpretation of the anti-treaty shopping rule, which should be more in line with the wording of the law and the jurisprudence of the ECJ. According to this updated view, the same quantitative claim of the shareholder is decisive.

The following examples illustrate the effects of the different views:

If the indirect shareholder would only have a lower claim for relief, the claim of the direct shareholder is reduced accordingly. For example, if (1) the dividend recipient resides in the EU and meets the requirements of the EU PSD (which provides full WHT relief) but does not meet the requirements of the anti-treaty shopping rule, and (2) the indirect shareholder would meet the requirements of the anti-treaty shopping rule but resides outside of the EU, and (3) the respective DTT only provides WHT relief to 5%, then WHT relief would only be granted to the lower WHT relief of the indirect shareholder (5% in this example).

Objective eligibility

Based on the amended anti-treaty shopping rule, an entity would objectively be entitled to WHT relief if the source of income (the investment in the dividend paying entity) has a material connection to the economic activity of the income recipient. The fact sheet does not provide any new practical guidance on interpreting the rule and refers to the limited explanatory notes in the legislative materials to the amended law.

Stock exchange clause

Based on the stock exchange clause, the dividend recipient would also be eligible for WHT relief if the recipient is personally entitled to treaty benefits but otherwise fails to meet the requirements of the German anti-treaty shopping rule. The stock exchange clause requires that the shares in the dividend recipient are materially and regularly traded on a recognized stock exchange.

In the past, the FCTO held the view that the stock exchange clause only applies if the shareholder resides in the same jurisdiction as the direct shareholder. The newly published fact sheet expands the application of the stock exchange clause, stating that the stock exchange clause is generally applicable if a direct or indirect 100% shareholder of the dividend recipient is publicly traded. However, this also requires that the publicly traded entity and every entity in the shareholder chain personally has an identical or higher quantitative WHT relief claim than the dividend recipient. Effectively, this confirms the application of the look-through approach also for purposes of the stock exchange clause.

Main benefit test

The German anti-treaty shopping rule assumes an abusive structure if the income recipient is neither personally nor objectively entitled to a WHT relief. This general assumption can be disproven if the income recipient can demonstrate that a tax benefit was not a main benefit from its interposition.

The fact sheet does not provide any new practical guidance on the main benefit test but remains superficial in nature. General remarks include that a case-by-case analysis is required, taking into consideration all benefits, tax-related and non-tax-related, and that tax benefits can also arise in a foreign jurisdiction.

Implications

The FCTO and the Federal Ministry of Finance have worked together over the past two years to adapt processes for dealing with applications for WHT relief given that average processing time of applications have peaked at 18-24 months — following a very strict interpretation of the revised anti-treaty shopping rule from 2021 onward and the switch to an electronic application system in 2023. In the context of these efforts, as of 1 January 2025, WHT exemption certificates (for dividends and royalties) can be issued with a maximum duration of five (rather than three) years. The updated fact sheet can be viewed as contributing to these efforts to make evaluating cases easier for taxpayers and the FCTO.

It remains to be seen whether the fact sheet for royalties will be updated accordingly. Until then, taxpayers should consider referring to the updated fact sheet for dividend WHT in their discussions with the FCTO in royalty cases as well.